Minding the Funding Gap

About reputation and incentives

The Chinese whale relayed through his translator that he would like the gentleman in Seat 4 to double his rebuy¹, another $10k. Worried looks crossed the table among the eight pros, myself included. This was the second time the whale had relayed this message.

Two pros came to quick arrangements to give Seat 4 a flag ($5k chip) each securing 25% equity in his action and more importantly the whale’s continued play. The whale would have left for baccarat otherwise.

Seat 4 did not want to rebuy — even if the extra money was not his action. Playing short stacked² made the whale’s play more exploitable. The whale knew this.

Seat 4 eventually caved in.

Everyone was incentivized to keep the game going. And funding followed those incentives. The game would have broke otherwise.

Debt generalizes. Equity specializes.

Income share agreement (ISA) proponents claim that incentives align better in equity deals. I believe this is true. Why is there more debt than equity in the world though? Why are there 30 times more college students than apprentices in the US?

Debt is top-down financing — think governments and institutions. It goes to market easier. Give the quants something to model and they will give you debt.

Equity is bottom-up financing — think poker pros and venture capitalists. Equity financing requires a deep competence — often local and niche — to work consistently. Seat 4 received equity financing from domain experts with specialized knowledge in poker.

Debt generalizes. Equity specializes.

Computing Communities Together

If debt and equity are at opposite ends of the financing pyramid than why might they converge now?

I vote the internet. And the lives we live on them. Digital native generations find entertainment, education, and work on the internet.

Specialized knowledge and interests no longer have a distribution problem. Information flows and high-trust communities form as a result.

One place communities form and gather is online forums. The more niche the better. TwoPlusTwo is where online poker enthusiasts came together.

Many of the equity agreements I’ve written about before spawned from these forums. Established trust among the online pros led to a desire for participation and collaboration — collective action. In poker, collaboration means buying “action” in each other. No credit score required.

Reputation Metagame

If funding is at the top of the pyramid and incentives are at the bottom, then reputation is in the middle. A thin middle layer. Thin because a foundation of aligned incentives do the bulk of the work, funding does the rest — but a little reputation can help the equity seller receive a better price.

Reputation is used for pricing more so than recourse in equity agreements. Debt uses reputation for recourse more than pricing. Second-time startup founders and successful poker pros keep more equity in their ventures without exposing themselves to more recourse.

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Poker reputations are forged in the beautiful grey area outside the scope of the official rules at a poker table. The poker session of the day is the game inside the game.

Poker is so iterative — new hands, new tables, new sessions — that pros lacking foresight for their reputation may pounce on short term gains without realizing the long term cost to their reputation.

Short term gains can come by way of “angle shooting” which are actions taken in this grey area. Not illegal and only sometimes against the official rules — angle shooting is always negatively perceived.

Profitably angle shooting may work a few times but not much more. Recreational players and pros alike will be warned by other pros. And forget trying to get someone to stake you if you come on hard times. The game is always bigger than the stakes of the day.

Swap Shaming

There is an information asymmetry college admission offices hold over incoming student applications. People do not go to bars, find an interesting and attractive person, tell them to hold on please because the night is young, something better might come along. Colleges do this — all the while encouraging more people to apply early and often.

If a professional tournament poker player is not at the ready to snap call an equity swap when asked — a reputation hit occurs. You can not shop for better options. Each player knows each other’s game, the expected competition, and all other specifics needed to make the decision. The speed that a decision is made or lack thereof can trigger a hit to your poker reputation. Also known as “swap shaming.”

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Students are rearranging their lives to start a new career. Schools are taking a chance their product can educate and find employment for anyone who meets basic criteria. Reputation precedes everyone but it matters less in equity agreements. Equity agreements often do not require FICOs or cosigners. What have you done lately? What will you do in the near future?

Why does one’s reputation matter in poker? The game is fluid, dynamic, and has a relationship with the unforgiving. For pros, swapping is a good short and long term hedge. One might need a full stake in the future or someone in their corner sweating the final table. Swapping action is a strategy for large quanta of time.

Swapping is the poker equivalent of breaking bread — it forms bonds. It aligns social incentives.

Internet of value

No matter the bonds, the value transfer mechanisms hamstrung the early global poker community.

For poker pros, wire transfers were inconvenient, slow, and associations with gambling made banking more difficult. Cash and casino chips worked great only when people were in the same city. Equity is local but poker was now global.

Traveling with tens of thousands of dollars in cash post 9/11 is a good way to spend time with airport security.

It should not be surprising Bitcoin entered the conversation early in poker. Again funding — and the means by which it happened — followed incentives.

Hyper-specialized communities continue to form over the internet — but an internet of value to serve them is still taking shape.

Clustered Shackles

Communities create stakeholders and this is what companies with dispassionate shareholders of the future are up against. Communities are optimistic, dug in, and share values.

These communities attract equity investments as experience consumption becomes more highly valued than product consumption. Maybe companies, especially public ones, don’t see it coming but communities are taking their market share.

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Look for these communities and stakeholders where norms for reaching consensus have emerged organically. Poker has piles but one specifically comes to mind.

Years of playing poker in southern California and Las Vegas I encountered many nationalities. Asian men — I never gave much thought to which ethnicity — would on occasion mutter a phrase I did not know but could immediately identify the meaning.

I later discovered the phrase to be Vietnamese and spelled “cùm cụm” as in “Let’s go cùm cụm on a tournament together.” It meant let’s go 50/50 on that tournament. Split the buy-in and split the payout.

The phrase, however loosely I do not know, translates to “clustered shackles.” It paints an accurate image. We rise and fall together. We are shackled, friend.

[1]: Refers to subsequent buy-ins (entries) after the initial entry.

[2]: The opposite of deep stacked. The stack is related to the big blind, a type of ante, in Texas Hold’em. Short stacks are loosely defined as a chip stack below 50 big blinds in value. In this instance $10k and below because the blinds were $100/200.

[3]: I do also think Income Share Agreements participants are just as likely to be exposed to exploitation.

[4]: Immediately accept at a moment’s notice.

[5]: Player A assigns 2% of prize-pool earnings to Player B and vice versa.

[6]: See also civil forfeiture.